SNB Keeps Rates on Hold as Hildebrand Signals Franc Concern

By Klaus Wille -
Jun 16, 2011

The Swiss central bank today left
its benchmark interest rate near zero as President Philipp Hildebrand said that policy makers are “concerned” about the
franc’s surge.

The Zurich-based Swiss National Bank (SNBN) left its three-month
Libor target rate at 0.25 percent. That’s in line with the
forecasts of all 26 economists in a Bloomberg News survey. The
franc surged to a record 1.1995 versus the euro today, breaching
1.20 for the first time.

SNB policy makers have been weighing the threat of the
currency’s ascent hurting exporters such as watchmaker Swatch
Group AG (UHR) against the risks of near-zero rates fueling price
pressures. While central banks from Frankfurt to Stockholm have
started tightening monetary reins, Hildebrand said at a briefing
in Bern today that “downside risks predominate” with the
franc’s ascent among the main threats to exports and growth.

“The franc seems to be the main reason behind today’s
decision,” said David Kohl, deputy chief economist at Julius
Baer Group in Frankfurt. “It isn’t hard to imagine that it will
show an impact on the economy at some point. We still expect the
SNB to raise rates in September but there’s a risk that they’ll
wait until the December assessment.”

The SNB left its growth forecast for this year at about 2
percent and forecast inflation to average 0.9 percent in 2011, 1
percent in 2012 and 1.7 percent in 2013. It had previously
forecast inflation at 0.8 percent this year and 1.1 percent next
before accelerating to 2 percent in 2013.

Intervention Loss

Hildebrand didn’t make any remarks on whether the SNB is
considering intervening in currency markets again. The central
bank has kept borrowing costs on hold for more than two years
and in June 2010 abandoned attempts to weaken the franc by
purchasing foreign currencies. Its intervention policy
contributed to a $21 billion loss in 2010.

The Swiss currency was little changed after the
announcement, trading at 1.1997 at 11:28 a.m. in Zurich.
Increasing investor concern that Greece may be forced to
restructure its debt has pushed up the franc 16 percent against
the euro over the past year. Standard & Poor’s this week lowered
its Greek rating and said there’s a “significantly higher
likelihood of one or more defaults” in the euro region.

The Swiss currency, perceived as a haven during times of
turmoil, reached an all-time high of 83.27 centimes against the
dollar on June 7. It appreciated 33 percent against the dollar
over the past year.

Growth Threat

The Swiss government in Bern on June 14 lowered its 2012
growth forecast, saying that any further franc gains would
threaten economic expansion “to a serious degree.” A
significant downward correction of the franc is not expected in
the short run,” it said on that day.

“Despite the strong appreciation of the Swiss franc, the
economy continues to benefit from robust international demand,”
the central bank said today. “However, margins in the export
industry are coming under increasing pressure.”

“For the SNB, the stronger franc could be the price to pay
to kill higher inflation expectations right away,” said Julien Manceaux, an economist at ING Group in Brussels in an e-mailed
note. “At this current juncture, we still believe that a first
rate hike in September remains the most likely outcome.”

Price Pressures

The franc’s ascent has helped shield the economy from
imported price pressures. Swiss consumer prices rose 0.3 percent
in May from a year ago, calculated using a harmonized European
Union method. In the euro region, inflation was at 2.7 percent
last month, prompting the European Central Bank to signal it’s
ready to raise its benchmark interest rate in July.

Hildebrand said that the latest inflation forecasts
indicate no “urgent need” to raise borrowing costs.

“Over the course of 2012, the path of the new forecast is
lower than that of March because of the latest appreciation of
the franc,” he said. “Towards the end of the forecast period,
inflation rises briskly. This shows that the current
expansionary monetary policy cannot be maintained over the
entire forecast horizon without compromising price stability.”

Hildebrand said that the forecasts are based on the premise
that the currency may stabilize in the medium term.

“Should the exchange rate again be subject to significant
changes, a reassessment of the inflation outlook would be
required,” he said.

Rate Expectations

Interest-rate futures show that markets have postponed
expectations for the first increase to March 2012 from December
2011. Swiss borrowing costs are the lowest among major global
economies after the U.S. and Japan.

So far, the Swiss economy is showing few signs of slowdown.
Manufacturing growth accelerated in May, leading economic
indicators held at the highest in almost five years and
unemployment dropped to 3 percent, when adjusted for seasonal
swings. That’s the lowest in more than two years.

“The SNB statement shows a more dovish assessment of the
economic outlook,” said Alexander Koch, an economist at
UniCredit Group in Munich. “Apparently the SNB chooses very
cautious rhetoric despite the still solid Swiss economic
situation. That’s the best instrument at the moment to prevent
further franc strength.”